Don't assume the price
will retreat rather get ready to face a situation when it touches 100
dollars a barrel

By SHABBIR H. KAZMI
Dec 27, 2004 - Jan 02, 2005

The prices of crude oil may have come down from its
23-year high of last month but if any one thinks that it will go down to
25 or 25 dollars a barrel level he/she is dreaming. There are forecast
that it can touch 100 dollars a barrel in next five years. This forecast
is based on fact that consumption is on constant rise and demand may
outstrip supply. Production cannot be increased at a pace the demand is
increasing. On top of this fears of disruption in supplies are growing.

To start with, let us look at the prevailing
scenario. There are four key factors which support the belief that the
march to 100 dollars a barrel has already started. First, consumption of
oil in China is growing at a fabulous rate. Its demand has already
surpassed that of Japan and it has emerged as the second largest oil
consumer after the US. Second, Yukos the Russian giant contributing
nearly 2% to the total global oil production is in serious crisis. The
stoppage of oil from Yukos sent oil prices to a 21-year high in July.
Third, the volatile situation in Iraq, sitting on world's second largest
oil reserves, does not seem to be improving. Fourth, the situation in
other major oil producing countries is resulting in frequent
interruptions in supply. Fifth, the US consuming one quarter of global
production seems to be running out of oil. Since 1970, US oil reserves
have fallen from 50 billion barrels to 20 million barrels. Sixth, across
the world the oil fields are approaching end of their productive lives.

According to some analysts the current squeeze in the
oil market — a concern in itself — is merely the harbinger of a much
greater global crisis. Spare capacity is at the lowest levels in history
and further growth in supply seems very difficult. According to James
Meyer at the Oil Depletion Analysis Centre, there were 16 large new oil
discoveries in 2000, eight in 2001 and three in 2002 and last year there
were no. There were predictions that oil production would peak in 2007
but it seems to be peaking much earlier, may be in 2004. One should only
expect lower production in the following years.

This spells terrible news for all those countries
where the economies are highly dependent on oil. It adds to the insult
if they are dependent on imported oil. Oil driven inflation is already
eating into disposable income and corporate earnings are shrinking. Just
assume what will happen when oil prices touch 100 dollars per barrel.
Some of the critics may say that it is too pessimistic an approach. It
may take years before prices touch such horrifying levels. They also say
that even the recent rise was due to speculation it is also a fact that
rising consumption and supply constraints are expected to keep oil
prices high in the foreseeable future.

According to Klaus Rehag of International Energy
Agency, "Overall speculative activity did not appear to show any
unusual trends and wondered if this means that 'commercials' are more
actively hedging physical risk. We feel that even if pure speculation is
responsible for pushing crude oil prices to the 55 dollars a barrel mark
or higher the near term, until the fundamental gap between supply and
demand as well as refining sector's structural issues causing high
light-heavy crude oil differential is normalized in favor of supply, oil
prices are unlikely to retreat back sharply."

According to a report from Investology Research,
"Given the uncertain political times we live in, we think the
futures market is correctly pricing in the myriad risks to oil supply
from existing sources, let alone any unanticipated shocks." The key
factors having the potential to influence oil prices are sharp slowdown
in the global economy and/or sudden stoppage of strategic petroleum
reserve builds by countries. However, no appreciable improvement in the
global political and security situation over the next 12 months as well
as low probability of recessionary conditions, the downslide risk of oil
prices in the short-term seems least probable.

IMPLICATIONS FOR PAKISTAN

Though the government resisted hike in local POL
prices for nearly seven months, it has to bow down before harsh
realities. It is evident that in order to combat the oil pushed
inflation, Pakistan has to exploit alternate energy resources.
Pakistan's perennial problem is high oil consumption in power
generation. This demands urgent exploitation of its hydel potential. It
has been nearly three decades that the country built its last major
hydel project. Addition of Ghazi-Brotha and Chasma projects has not
really helped in shifting the burden from thermal to hydel. Indus River
alone has the potential to generate more than 10,000 megawatts, provided
the right projects are built. The national has already wasted three
decades in unnecessary debate over Kalabagh Dam. This is not the last
word the country needs to build new water storage facilities as well as
hydro power projects. Don't waste further time and make the decision at
the earliest or be prepared to face the consequences.